NUMBER 2: MONEY MARKET SAVINGS

Money market savings tend to pay a little higher interest rate than high-yield savings, but they usually require a higher minimum deposit. This is the main reason I prefer high-yield savings accounts over money market accounts, but there’s not much difference.

One advantage of money markets is that they allow check-writing and debit card withdrawals. However, you get the same benefit from your high-yield savings if it’s linked to a free checking account. You just have to take the simple step of transferring the money from your savings to checking.

That being said, either one will do a fine job storing your emergency fund.

NUMBER 3: CERTIFICATE OF DEPOSIT (CD)

In general, CDs pay about the same as a money market savings and also require a higher minimum deposit than a high-yield savings account. The only reason I rank CDs lower than money market savings is that they typically require a minimum holding period (maturity date) of 3 months. To qualify for the higher rates, you’ll usually have to agree to the longer maturity date.

Because this money will be used in an emergency, I prefer to keep CDs with a maturity date of  6 months or shorter.

WHAT ABOUT Short-term U.S. Treasuries (T-Bills)?

T-Bills typically pay higher than high-yield savings accounts and only require a $100 minimum. You can purchase durations as low as 4-weeks.  They are backed by the full faith and credit of the United States government, which has always repaid its debts for over 200 years.

Last year, T-Bills were my #2 place to park my emergency fund. This year it’s off the list completely. Last year, T-Bills paid better than even most CDs. At the time of this writing, T-bills don’t even pay as high as my high-yield savings account.

WHAT ABOUT A ROTH IRA?

I’ve seen articles recommending a Roth IRA as an emergency fund. I think that’s a bad idea, and here’s why.

As an investor, the primary purpose of my Roth is to maximize returns. If I start to comingle my investments with my emergency fund, I won’t be able to stay focused on investing. It will also be difficult to track my performance against the market since the emergency fund part of the portfolio would weigh down returns in good years.

That being said, if I’m in dire need of money and my Roth is my only option, then you bet I’ll take money out of it. However, I don’t want to get in the habit of viewing my Roth as an emergency fund for the reasons stated above.

WHERE DOES THE AUTHOR KEEP HIS EMERGENCY FUND?

I personally keep my emergency fund in a high-yield savings account.

The high-yield savings account I use is through Alliant Credit Union. These are the things I like about Alliant:

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• High Interest: Currently 0.90% (in June 2020) and gets updated regularly as rates change
• No fees: If you sign up for electronic statements
• Low minimum deposit requirements: Check with Alliant for their current requirements
• Sub-accounts: Alliant calls them supplemental accounts and they’re great tools when saving up for specific goals. I give these sub-accounts nicknames like “Fun and Adventure” for my vacation fund or “Sweet Ride” for car maintenance and insurance.
• Free checking that pays interest and reimburses ATM fees: Having a checking account that pays interest is awesome! I don’t use the ATM that much anymore, but it’s nice to get reimbursed.